It’s Just A Student Loan, Right?
In fact, there are two types of undergraduate loan, explains Phaedra Bird of Crowe Clark Whitehill in the Isle of Man. And from 2019, postgraduates may be paying back debts of their own. It’s potentially a recipe for confusion.
Most of us are familiar with the basic idea of student loans. You borrow money at the outset of your degree course and start repaying it when you’re working, once your income exceeds a certain level. The outstanding sum will get written off eventually if it’s not repaid within 30 years.
The system up until now has been relatively straightforward for employers on the administrative side, but there are now some potential complications. It all stems from the launch of a new type of loan back in September 2012.
Loans issued before this date are known as the ‘Plan 1’ type and continue in Scotland and Northern Ireland. Those taken out after this point are referred to as ‘Plan 2’. The first cohort of people with Plan 2 loans graduated last year, so they’re now due to start paying back what they owe.
So what are the differences between Plans 1 and 2? Well, the repayment thresholds are the main issue. With Plan 1, you start to repay at 9% once you’re earning over £17,335, whereas the figure is £21,000 for Plan 2. A decision has been taken, following a consultation process, to freeze this latter figure for all borrowers.
If you’re an employer, you’ll need to know which type of loan the student has. Finding out is fairly straightforward, but you can’t necessarily rely on your employee knowing. To them, it was just a loan. And what if they have both types? The rules say that the Plan 1 loan should be paid off first. But as things stand at the moment, there is no intention to issue a stop notice for it. You will, instead, have to rely on the start notice for the Plan 2 loan.
Of course, many employers will want to think they can handle this, but there is the potential for an administrative error leading to a double deduction being made. Payroll systems should take the two schemes into account and the HMRC PAYE Basic Tools package is being updated too, as you might expect. But is everything going to be watertight?
There’s then a further complication. From August this year, the Government is making postgraduate loans available to anyone under 60, which will become payable from April 2019. Although the threshold matches the Plan 2 at £21,000, the rate of repayment is 6% rather than 9% above this point. Imagine the confusion when these debts are being repaid alongside Plan 1 or Plan 2 loans.
The message here is to be prepared. Although there is nothing intrinsically complex about the arrangements, the room for administrative hiccups is going to get bigger and bigger over time.